same. i know the stockholders obviously are crushed thankfully and leadership is gone and those are all good things if the institution fails but i'm just wondering, i think i accurately discussed how that's going to be and we spent a lot of time with them and i'm just wondering if you feel comfortable about that or would we be better off if there's systemic risk for the fdic to step in potentially during the immediate phase but then move it on to an orderly bankruptcy at that time because again that's what happens in a bankrupt, the entity continues to operate. you would really move away from any kind of potential -- i'm not saying this would happen. where creditors were dealt with because they knew the right people. >> senator, i understand your concerns. i don't share them in this case. let me explain. i think what the fdic is designed to do exactly what you said the objective should be, which is to come in if necessary

and dismember the institution, put it out of its misery, sell whatever is viable remaining -- >> that's not what they're doing. >> i believe that's exactly what they're doing. >> they're just doing it at the holding company level. >> i think that's a slight misimpression. i understand your concerns about this. what they're trying to do is make sure they have a practical way to do the practical equivalent of bankruptcy for a large complex financial institution and what congress did that is important is to deprive them and the fed and the other relevant agencies of the ability to protect them from their mistakes and to leave them to survive to fight another day. you deprived them of that ability, which you should have done. i know that ranking member shelby, long standing concern about this and you said in your opening remarks, same basic concern. i don't think it is right for

these reasons. what the bill does is force the largest, most complicated institutions to hold more capital against risk than would a normal commercial bank, a small regional bank, a community bank and it means that if they end up making mistakes that put them in jeopardy, the government can do nothing but step in and dismember them safely at no risk to the taxpayer. now, i understand your concern. i don't think it's justified by their strategy. >> what i would like to do because i don't want to spend the whole five minutes on this, i don't think the word dismember is appropriate. we don't necessarily have to talk to you. >> that's not really a technical term. >> dismember means -- i think what fdic has found is that these organizations are so intertwined, they're not like stove pipes that you can just move off to the side. because of that, they're not dismembering them. they're going to allow them to operate up to five years and

then re-ipo them so that's a different concept. i see some of the benefits of not creating concentration because another large institution may have to take those pieces. i understand the problem. i don't think that's exactly what congress intended and i just think that if it's going to be laid out the way it is, one of the things we might think about is a real bankruptcy taking place because in essence the institution continues to operate under bankruptcy. let me just move onto one other point. this took longer than i thought. the money market funds. i think you all believe that they create systemic risk as they are currently set up. the fsoc. is that true or false? there could be systemic risk? >> i believe that although they are in a stronger position and smaller in size because of the reforms that have been taken by the fcc, i still believe as does fcc and the fed, they are

vulnerable and could hurt the system as a whole. >> the fcc -- by the way, contrary to some of the folks on my side of the aisle, i don't understand why we're protecting them exactly the way that we are right now. i think the fcc hasn't come up with the right solution. i wonder if you happen to know what that right solution might be? it seems we haven't quite come to the right conclusion on the money markets and if the fcc doesn't take action, i think the fsoc can and i wonder what your thoughts might be in that regard? >> i think it's important that the fcc propose a range of options for how to go forward in this so that the market can assess those and comment on them and the fcc and others can reflect on what that means for getting the balance right. the fcc has to go farther than they have gone. there are a range of options people are considering as you

know. one option is to go to full floating -- >> that would take a tax code change to make that happen. >> a range of things. one option is to have a mix of investment restriction, liquidity requirements and capital requirements to protect against this risk and another option is to have a mix of those things and a holdback provision and it's a complicated question. the fcc can go further and we should get on with the business of letting them expose to the world and to the markets a set of options that the world can comment on and help refine. >> i agree it should be more market based than what it is. it should not create tax consequences and that may be a way of solving it. if i could just ask one more question. a lot of community banks are in here lobbying us about the transaction account guarantee. i think it expires at year end.

i if you look at a transaction account, it doesn't take much activity to be -- to have a transaction account. if you have excessive reserve with money markets paying almost nothing and you can move into a transaction account that's fully guaranteed, i think there's already been tremendous flight into transaction accounts for this reason because it's fully insured, i would just love to have your thoughts as we consider this at year end. should we continue to extend full guarantees on transaction accounts, full guarantees, or should we end government involvement in that way? >> very good question. the relevant parts are thinking through that question now. it is not -- our judgment has been it's not necessary to extend it. that's the judgment of the relevant authority so far. this is an issue and concern to

many people and we'll look at those concerns carefully. >> a section of your report addresses housing finance reforms as an issue to be concerned about and you note that differing state standards on foreclosure practices, the lack of standards, all of these are relevant to restoring market for private capital and financing. i wanted to focus on a different piece of that puzzle. and that is we have about 4 million families who are under water who do not have fannie and freddie loans and they are essentially locked into high interest loans with no chance of refinancing. i consider this a systemic risk from my perspective because those families become high risk for foreclosures, foreclosures drive down the price of the

market and the my amount of money they pay every month compared to what they would pay at lower interest means they don't have extra spending money, if you will, that would strengthen other parts of the economy. and so all of those things are interconnected. and so that's a piece that i have been immerced in and i would like to ask if you have concern about the families with no refinancing options and if we can kind of get an effort as much support as you can possibly give to help us address that piece of the puzzle. >> we share your view completely. the president is supportive of legislation in that context. your own leadership in this stuff we fully support. we like the way you designed it. i think it's good economic policy and good for the country to become law for the reason you said. it's not just a fairness question but it would help reduce the remaining pressures

the housing is putting on the economy as well. there's a good economic case for doing it. you can do it in a way that doesn't leave the taxpayer at risk. we would be supportive of progress in that area. >> i realize there are questions that have to be resolved about whether programs and modification of existing program but we have a number of these funds out there, congressionally approved that are underutilized and if one is a modification of another, it seems launching a few pilots would help pave the path for us to build momentum. >> the policy is very good. it's very well designed. we would like to work with you on it. the question is whether we can find legal authority and resources to test on the pilot basis. >> thank you. i wanted to turn to another issue that i thought carried some systemic risk. there was an article in the financial times just about a

week and a half ago about banks stepping up their oil trade role. the article basically says that several of the largest banks have got into close relationships with refineries in order to have contracts to provide the crude to the refinery to buy the refined products after they're refined and this is essentially because under the draft rules spot commodities are exempted from pr proprietary trading concepts. my question is three years from now are we going to have a situation where because one entity is affecting the supply of oil and trading over the contracts affected by the price of oil essentially a conflict of

interest that's an enron style issue? >> good question. you can think about this in two different ways. it's very important that we have in place safeguards that limit the risk -- banks take risks in this area that could threaten the security of the market generally. we limit the risk they hold. and provisions like the volcker rule are part of that important objective. but in addition to that, you need to make sure that the market regulators have the authority that they need to make sure that they can police and deter manipulation and one of the things that's very -- the most important consequence of the fact that the s.e.c. and fdic definitions they adopted this month on swaps is that will unlock a range of additional authorities they have to police

abuse and manipulation. both of those two things are important to address the risk they pointed out and we are going to be very focused on making sure we're not just limiting the risk they take too much risk in those areas but that the market is not vulnerable to manipulation and abuse. >> thank you very much, mr. secretary. thank you. >> senator? >> thank you, mr. chairman. thank you, mr. secretary. i also wanted to ask some things about this very concerning libor issue. as we sit here today, do we know whether citibank, bank of america, jpmorgan, which participate in the libor process like barclays, did or did not similarly manipulate libor? >> we don't know that, but i think that's a question you need to refer to the enforcement agencies and i suspect you're going to find that because this is still a confidential

investigation, they won't be in a position to answer that question until these remaining investigation is brought to its natural conclusion. >> we don't know that as we sit here today? >> i can only tell you what i know, and i don't know that. i don't know what they know. and the reason i don't is because as you would expect, they have very careful protections around their investigations to preserve confidentiality. >> when did you first know about this libor issue and manipulation? >> as i said, in roughly the spring of '08 -- >> spring of '08. so we're now over four years later and we haven't answered that question. >> i don't think that's quite right. what we did at an early stage in this process is bring this to the attention of the highest levels of the relevant agencies

with the authority to prevent manipulation abuse -- >> brought it to the highest levels but we haven't gotten to the bottom of it 4 1/2 years later. doesn't that unequivocally suggest somebody dropped the ball? >> i don't think you should look at it this way. the cftc at that same time started this investigation ultimately involved the s.e.c. and the justice department in it and it is true it took four years for them to find the evidence they disclosed in the settlement. i don't know that's surprising if you look at what's typical in financial cases like this. again, if you look at a cross history of these things, these things take a lot of time. you have to do them very carefully. >> do you expect it to take 4 1/2 years and we don't know whether citi, bank of america and jpmorgan were involved in this? >> to their credit, they started very early like we did in trying to make sure that they were

examining carefully there was not risk of this behavior but actually happening in that context and they deserve enormous credit for doing that. >> as prudential regulator of the new york fed of these three institutions, did you in the new york fed look into the issue directly? >> i believe that we did the necessary and appropriate things as i said in bringing this to the attention -- not just to the fed and fcc and fdic which is an important thing to do at that early time but also to the attention of the british. >> can i just follow-up on the question? you don't think this issue with regard to those three institutions potentially impacted their safety and soundness? new york fed was the primary regulator of that. >> i thought this was a very important issue not just for our financial system but for the global financial system which is why we did what we did. again -- >> do you think it potentially went to the safety and soundness

of the three institutions? >> i don't know. i don't think i needed to know that because concerns themselves were significantly troubling to justify a very substantial response. >> given what we all knnow agre is troubling information about libor, why was it allowed to be essentially the repayment metric for t.a.r.p.? >> what you're referring to, i believe is in a series of specific programs, the fed and treasury undertook in the financial crisis, we, like many investors, used libor as a reference rate. in many ways we were in position as investors around the world which was making use of the best available at that time. were we disadvantaged by that? we don't know whether we were or not. we're looking very carefully at

that question. obviously we'll be in a position to brief you on that once we looked at it carefully enough. >> when libor was used in those contracts, you and others had knowledge of the fundamental systemic concerns about its validity, right? why was it used in those contracts? surely were there other alternatives and surely the federal government was calling the shots. >> we needed to choose what rate to reference and we made a judgment at that time what was the best rate at that time and it is true that same broad time frame we knew this rate was vulnerable to the type of practice we faced but we don't know whether we were disadvantaged by that choice. it's not clear at this stage. this is really a question you should talk to the s.e.c. about. we don't know at this point what impact that behavior had the rate up or down for investors to

borrow. as one of your colleagues said earlier, it's possible that people who borrowed money were advantaged by this. it's possible people were disadvantaged. we don't really know to the extent that happened. >> it is certainly easy to imagine -- let me put it this way -- megabanks that borrowed money were advantaged by manipulation of libor that artificially pushed it down, correct? >> it's possible. >> if that happened, the taxpayer was disadvantaged? >> if you read carefully the s.e.c. settlement documents, you'll find that the attempted behavior went in both directions so what you don't now know is what impact that had on the rate itself or the direction of the impact. that's a very important issue and it's an issue which those agencies and the other agencies that are part of the council are going to examine very carefully. it's going to be a matter of litigation as well.

>> you knew when using libor that it was manipulated so there was that potential so why did we use it? >> that's not quite accurate what you said. we knew the way the rate was designed as i said fully in the public domain that the rate was designed where banks, mostly foreign banks, were presented estimates of what they might pay to borrow across these different currencies and therefore as you might expect, any rate that's an average of estimates, there is some risk in that context. it was just that risk that caused us to push for broader reforms. >> beyond that you knew of reports of manipulation? >> we knew of reports of misreporting in that context. again, what we did was in terms of choosing a reference rate which we do what investors around the world did which is we had to make a choice among alternatives and that was the best alternative available at the time. you can't say now with

confidence that that choice in any way disadvantaged the american taxpayer. it's quite unlikely. we'll take a careful look at that. >> again, let me just wrap up because i'm over time. it seems to me that treasury and the fed and the new york fed knew of basic problems with libor, knew of charges of manipulation that underreported and pushed down the rate and then the treasury adopts that very metric for t.a.r.p. repayment. now, it's very clear that raises the huge potential of advantaging those megabanks and disadvantaging the taxpayer. thank you, mr. chair. >> mr. secretary, thank you for your testimony. i was reading as someone that wrote a letter on this issue on libor that documents were released by the fed bank show as early as august 2007 barclays

told fed analysts about possible problem. earlier in 2008, you made recommendations to the bank of england but performed the security and exchange commission and under the federal reserve those are all -- let me just see my history. 2008. who was the president of the united states? >> you know the answer to that question, senator. president bush was president. >> who were the appointees made by? >> appointed by the president and confirmed by the senate. >> this was known to entities going back into the bush administration and when you became aware of it, you raised it to all of those appropriate entities that had the where with all to conduct investigatory abilities to pursue, is that a

fair statement? >> that's absolutely a fair statement. >> with that in mind so that we cast this in the appropriate context, it still is challenging and troubling because obviously the reasons that barclays enters into a consent agreement is because they did something wrong. when they did something wrong, there's a manipulation of some sort. depending on that moment that you borrowed as has been said, you might have actually benefited or you might have actually been caused harm and considering how many mortgages and other commercial instruments are indexed to libor, that's a real concern. my question is as we move forward here, how has the treasury or the fed considered issuing our own american libor or using banks data when calculating a number? is that feasible? how do we prevent this from happening again because one of my frustrations is that we can in the congress pass and have

the president sign laws that define what is acceptable and unacceptable practices but we can't seem to get the culture and financial institutions, many, not all, many financial institutions to accept that. so one, can we have an equivalent of an american libor or other index that would be more transparent and less subject to manipulation and how do we get culture here to turn around. >> you need tough rules, tough safeguards, enforced by people who have resources to enforce them. there's no alternative to that. you can't regulate for ethics. you can't regulate for culture. you have to assume they will take risks they don't understand. that's inherent in finance. the job of washington and government is to make sure there are tough rules in place that can be enforced and that

requires resources and not just authority. now, we are looking very carefully at not just what reforms make sense to how libor is determined but what alternatives might be better for the system going forward and we'll do that very carefully and involve all relevant people and we'll brief this committee and the congress as we go through that process. as you're pointing out, it is an interesting thing. an interest rate that affects the price at which americans might borrow in dollars was set in london by a group of foreign banks largely by a group of foreign banks who needed to be able to borrow dollars occasionally under a process overseen by the british bank association. it's a strange thing. and so it is right to think about what is a better alternative to that now and that's one of the things we're focused on. >> i think the question is right to think about what is an

appropriate alternative here. i appreciate your answer to my question of culture. let me just say if we have rules and regulations, laws and even if we give, which i support regulators, the resources to pursue this, we need vigorous sanctions at the end of the day so people get the message this is not simply the cost of doing business. >> i agree that's what enforcement means. >> i have an issue with colleagues that want to retract from those sanctions otherwise we're not going to change the culture and the american people are ultimately going to be subject to the risk of those who make decisions that ultimately create collective risk. that's a huge problem. finally, i would like to ask you, can you tell us at a time that your testimony talks about european debt crisis remaining a looming challenge for the united

states, with the possibility of defaults in certain countries, what have we done to know the full exposure of u.s. banks and other institutions to the debt of the european countries and if they were to materialize at this point in time, what are we doing to limit the effects on americans in that context? >> very good question. the federal reserve has for throughout the past three years just carefully looked at how best to measure the potential exposure of u.s. banks and other financial institutions to those parts of europe. as i said in my opening testimony, we forced banks to hold much, much more capital against risks. 400 billion more than before the crisis. banks have moved aggressively to significantly reduce and limit their exposure to the risk they pointed out. that happened to money market funds too which is important in

this context. now, it's important to recognize that europe is a very large part of the global economy and the largest, strongest economies in europe are still very big and very consequential. a prolonged serious financial crisis in europe that goes long beyond a long recession would have significant implications for our economy because export growth would be weaker, financial conditions would be tighter here, and that would add to the pressures we're facing on the u.s. economy. u.s. institutions hold more capital against the risk in that exposure and that's a good thing for us. >> senator toomey? >> thank you, mr. chairman. mr. secretary, thanks for being with us. just briefly i want to follow up on a discussion that we had earlier about money market funds. i just want to strongly urge you to reconsider the position that

the fcc needs to adopt a new round of regulations now for several reasons. first, i am not aware, we certainly have not seen the evidence that the new wave of regulations already imposed in 2010 is somehow inadequate. we have seen that this industry is now in a stronger footing and got through some very difficult times last summer without a single hitch suggesting in fact that they are in pretty good shape. second point i would make, this notion that i see repeated often that they are somehow susceptible to runs is quite ironic to me given that over the 40-year history of hundreds and hundreds of funds through all kinds of extraordinary historical moments, there haven't been runs. so to suggest that we need this new wave of regulation, some of the proposals of which i'm concerned would destroy the product. the capital requirement i don't think achieves its stated

objective. it's unaffordable with holding requirements i think badly damage the product. so i would like to just urge you to reconsider this. i think this is the wrong way to go. the questions i would like to get to if i could is on libor. first of all, there has been some suggestion that some of the british regulators may have known and in fact may have condoned or even encouraged some misreporting during the financial crisis for fear that otherwise a perception of risk at these banks might cause problems. i think i know the answer. just for the record, did you or any regulators that you're aware of ever actually condone or encourage misreporting of libor? >> absolutely not. >> that's what i thought. here's what i don't understand. that is how you were aware of this in early 2008 and for the

last four years you never used the bully pulpit that you had to, a, warn the american people. there's literally hundreds of municipalities receiving libor payments and we know and you knew that those libor payments may not be the correct payments. in fact, might very well be less than what they ought to be getting. these municipalities didn't know that and they should have. the second thing and then i'll let you answer. the second thing is why did you not use the enormous influence that you have had both at the fed and treasury to persuade the financial institutions to adapt the different mechanism that would not be subject to this kind of manipulation when there are other alternatives available? >> i did what i thought was the most effective way to get to the heart of this. in general, you're right, there are some problems that you can address by talking about them.

generally i'm of the view that it's better to act on these things and that's what we try to do. now, these concerns that you refer to as you know were in the public domain at that time. "the wall street journal" among others did a very good job reporting these concerns and the vulnerability we were worried about was there for people to see. now, in this period between that time, spring of '08 when we acted and when the cfdc annou e announced a settlement earlier this month, they were involved in a far reaching complicated difficult investigation which ultimately covered the damage you referred to and they involved the fcc and justice in that context and fully appropriate and that process took time. in the interim, the british did

do some things to try to reform the way the rate was structured. i don't think those reforms went far enough. our system has to work this way. you have to combine reforms to the underlying problem that we set in motion with enforcement action, with consequences and that's exactly what happened in this context. >> i am not at all suggesting we shouldn't have had enforcement. i think we should have. absolutely. my concern is that knowing that this rate did not have integrity, you nevertheless stood by while thousands of transactions were being executed and interest rates swaps, loans, all kinds of agreements, and it seems to me you could have used the enormous persuasive power that the secretary of the treasury has to encourage and persuade the financial institutions to fix this or start using an alternative mechanism. >> that's exactly the objective of the actions i took at that early stage in the process.

i do think it's important to recognize that the market began some time ago. the market was broadly aware of these concerns. investors, borrowers and lenders were aware of these concerns. it was driven by the recognition that their interest may be better served. i want to caution that it is important to take some time to carefully examine what was the impact of the behavior on those rates. again, i don't think we know with confidence now the direction of the impact or the magnitude of the impact. that's a very important issue and critical to restoring trust and confidence in the system and i think the relevant authorities are doing a careful job of looking through that. >> my time has expired. i'll close by saying i understand that we don't yet know exactly the direction or magnitude of the cost but we know this was a process that lacked integrity. i would suggest that some transactions that were entered into and subsequently resulted

in significant losses may never have been entered into in the first place had participants understood the lack of integrity in this rate setting process. >> that's one reason it was so important that we did what we did which is to not just reform the process but make sure the authorities responsible for abuse and manipulation had the ability to act on those concerns. >> senator bennett? >> thank you, mr. chairman. thank you, mr. secretary, for your testimony. just on the libor point when the chairman of the fed was here the other day, he talked about the possibility of moving toward a more market based alternative to libor and you mentioned to the senator that maybe we should think about that. what would those alternatives look like and i think the point that he was making was rather than having rate reported by a small set of banks, you might

find yourself in a place where you could have rates stress tested by the market to have confidence in what we were getting. >> you're right. one of the dominant questions before the council and people looking at this question is exactly what would be a better alternative and what transaction based rate would better serve the broader interest of the market? there are other parts of the financial markets where they relied on survey based estimates and they do that for very practical reasons. and that doesn't necessarily make it vulnerable to the type of incentives of misreport on this case but you have to ensure safeguards are designed carefully so it's not vulnerable to that. we'll look at those options and be happy to brief this committee. >> i think we would like to hear about that. there are probably some situations where the market is

lagging or transactions aren't actually happening and you can see why in that circumstance you may not have a market rate that would work but it would seem that there ought to be one that could replace libor. that would be very interesting to me. robert samuelson had a piece in "the washington post" this week called the $12 trillion misunderstanding. in this piece he accounts for how we got from a projected budget surplus of $5.6 trillion that was made in 2001 to where we are which is 6.1 trillion and $11.7 trillion swing he says. he goes through and says this is how we got here. the biggest cause of it was the recession itself which was about 27%. if you add up the recession and the tax cuts from early 2000s, you're at 40%. if you add up the iraq and afghanistan war, you're at 10%.

that's 50% of where we are. increase in defense spending, 5%, obama stimulus, 6% and so on and so forth until he gets to 100%. his conclusion is most theories often partisan of the $11.7 trillion shift turn out to be wrong, exaggerated or misleading. there were lots of causes. no single cause dominates. i think i would like to enter that article in the record, mr. chairman, with your permission. i think he very clearly lays at the comprehensive nature of how we created this problem and the reason why we're going to need as you have testified a comprehensive solution to get out of this problem. as we think about coming to the end of the year here, it seems to me maybe there are four alternatives to what we face. we would go over the cliff. when i say we're going over the cliff, it's not the united states congress. we're driving the american people over the cliff if we don't do something. that's one option. we could let the sequester go into effect and tax cuts expire.

we could do as we've done for a long time and continue to kick the can down the road and just say we didn't really mean it. when we put this tough sequester in place, we didn't really mean it so we'll turn around and lift it or extend the tax cuts. we could solve the problem in a comprehensive way during the lame duck session or we could put some process in place to try to get us to a solution in the new year. i wonder if you could talk a little bit about -- first of all, are those the only alternatives? maybe there's something i haven't thought about. second, how the financial markets would respond to those or maybe what would be the most reassuring thing we could do for the american people at the end of the day not to repeat the travesty of last summer. >> if congress tried to defer

everything, tax cuts and sequester and do nothing about the long-term fiscal position and nothing to help growth in the short-term, that would be very damaging to the interest of the country. i think to say that as a nation we have no capacity to come together on a set of reforms to address these problems and have to go as you use your phrase go off the cliff, seems deeply responsible. i think the solution to this problem has to lie in and there's been a lot of function laid by you and others and your colleagues in this direction over the last year in particular, the solution has to lie in replacing those expiring tax cuts for middle class americans and the sequester with a balanced mix of reforms that will raise a modest amount of revenue and lock in some carefully designed savings to make our commitments to seniors more affordable over time and

still preserve room to invest in things necessary for us to grow. that's the way this has to be resolved. if we were to do that as a country, that would be good for confidence and good for the economy and good for certainty and it would demonstrate again what the world has always believed about this country which is ultimately we come together and do the necessary thing. we don't wait until it's too late. >> i apologize because i know my light is red. i've been here for the whole hearing so i'll ask one follow-up question. i learned so much. it's been good. one follow-up question to that. i don't believe there's enough of this around this place but at home people do have a sense that we're all in this together. we have to come together to fix this together. and at least in colorado they really are sick of the partisanship in this place on this topic. could you give us -- in that spirit -- a sense of what the scale we would be asking

ourselves to commit to versus what they have to do in europe for example. and what we would be asking our generation to do to secure the future for the next generation as a relative matter what the people in these other countries are doing go to have -- >> excellent question. let me try to do it briefly. to get our deficits down to a level where the debt stops growing as a share of the economy, we need to do it on top of the trillion dollars of savings congress enacted last year. we have to agree on roughly $3 trillion at least of additional savings. that seems like a lot to people but it's only about 2% of the national output income this economy creates. it's roughly 2% of gdp. that's a very manageable challenge for a country like us. if you do it carefully with sensible reforms on the tax side and carefully designed savings on the spending side, you can do

it without causing any damage to the growth prospects of the u.s. economy and to the basic confidence and security retirees have or what people have for health care even the basic safety net for low-income americans. the challenges faced by every other major industrial economy in the world from japan to europe are vastly greater because growth potential is weaker, populations are much older, the size of their governments are dramatically larger, the generosity of their commitments are much higher. our challenges feel daunting to us and can't be deferred forever are completely within our capacity to act again without asking americans or business community or retirees to accept an unacceptable basic burden in that context. that's why it should be within our capacity to solve. we can't control what europe does. it has big effects on us. they're not within our capacity

to control. these things are completely within our capacity to control. they are completely within the ability of this body to come together and agree on some sensible reforms. >> thank you, mr. chairman. senator? >> mr. secretary, i sure appreciate senator bennett being here the whole time. i can assure you i've been watching on television and i've learned a lot too. i admire senator bennett for being here the whole time. i've got some prepared questions but let me just follow up on what he says. two things. these carefully structured savings, carefully structured savings, they have to include savings in the entitlement programs like medicare and medicaid. that's correct, right? the witness is nodding his head. >> that's correct. the president has proposed

hundreds of billions of dollars of savings in that area because as you know the long-term deficits are driven by mostly the ageing of america and rising health care costs. >> and for example the medicare program -- i think we all concede senator bennett has been outspoken on this -- a program that grows at three times the rate of inflation cannot be sustained and that's medicare at the present time. >> that's right. i think that even with the long-term savings in the affordable care act and even with what you might call promising slower growth in health care costs, long-term projections still show unsustainably rapid growth because more interns are retiring and the cost of health care is still rising. >> and i think also most of us while appreciating the importance of the savings in the budget control act, i think we agree with secretary panetta and

other members of the administration that the approach of the sequester by the end of this year is not helpful to the economy, is that your view also? >> again, the sequester was designed by the republican and democratic leadership not because it was good policy. it was designed to force this body to make some compromises on a set of long-term reforms. that was its purpose. >> now it's the law of the land and we didn't get the result out of the super committee that we wanted. you agree it's unsettling for the economy to be facing this approach particularly in the defense and other important discretionary programs between now and the end of the year. >> i would say it a little differently. i think what's damaging to the economy now is the combination of inability of congress to find

legislative majorities that would help growth short-term and long run as well as an inability to come together and agree on long-term fiscal reforms to replace the sequester. i think both of those concerns are weighing on the economy. i don't think they're as big as direct effects on europe or spending is falling across the government, but it is a risk and it's referred to in this council report and i think we all have a responsibility to try to demonstrate to the american people and the private sector that again this body is going to be able to come together and make some tough choices on a balanced package of reforms. what the sequester is designed to do is to force that and if congress in the face of concerns about the impact of spending cuts were to simply defer them, that would not be good for confidence. it would leave the world and the markets concerned that it's

another symptom of inability of democrats and republicans to compromise on things that are in the interest of the country. >> my clock is ticking too fast for us to go on with this. let me just say that there's -- i think the looming sequester is hurting economic confidence even as we speak. it's going to make the economy worse between today and the end of the year and i don't think i want that. i don't think you want that and i don't think the president wants that. let me ask one other question. da áwq.gq,exáq

aig to protect the economy from a failing aig on current estimates, the taxpayer in that case, too was likely to realize the full term. looking at the exposure. common equity in aig which we've begun to sell and we expect to sell down significantly over time and moving as quickly as we can and as important as the results on how carefully we managed the taxpayer's exposure

and it's important to recognize that they move to not just replace the management and board of the institution, but to bring down the risk and the risky parts of the entity that prove very dramatically. alongside what the state insurance companies have been doing to make sure the insurance businesses at aig are closely supervised and monitored, we've been very aggressive in bringing down the risk. i'll just give you an example, the derivative exposure which so famously has been at the center of the vulnerability has been reduced by 90%. so aig is in a much less risky position today, and a very different firm and they look into the government's exposure and this is a remarkable thing and is likely to show that they have a modest returns and substantial exposure. that's a remarkable outcome at the time. >> so you disagree with the conclusion of the inspector

general. >> i don't think the --? it is unlikely to get some of these funds back ever? >> again, we can't -- all we can know is what the remaining exposure is and what the market value is in exposure today, but it is not a matter of dispute. it's a matter of fact. people might take different views of what happens to the taxpayers' remaining exposure and the common equity of aig as the world evolves going forward and that's something we don't have certainty over. and of course, there are some states where that may not turn out as well, but on current estimates it looks favorable and most of the exposure has been recovered for the fed and the treasury. >> thank you, mr. chairman. i appreciate you, secretary geithner being here today, and ilonly ask one question because i have to preside over the senate. the fsort recently exercised key

authorities when it designated eight firms, and as i understand it, these companies which are often referred to as the plumbing of the financial system have not challenged those determinations. the timing of these mid-will j july determinations made it impossible for the fsot to include the discussion of the selection process in its most recent, updated report or annual report. can you talk about the determination process, why were those eight firms selected and will there be other firms selected for a desing nation and what does the designation mean for the firms going forward. >> two types of authority that were provided in the financial reforms congressman act and the ones that you refer specifically refer to the infrastructure and we designated eight firms and what that means is we have the authority and this is very important, and didn't exist before to make sure they're run with conservative cushions against risk and they're

protecting the system from systemic risk. we went through a very, very careful process within the council to identify the criteria to decide where we needed to extend that authority and we went through a very carefully-designed process to make sure we gave the firms the opportunity to context it. we r remaining authority that we have not yet executed, but we will, to designate large, non-bank financial institutions and we haven't made that judgment yet who as we saw in '08 could pose to the broader economy and the taxpayer. if all you do is limit leverage and capital for the core of the banking system and there's risk over time as we saw in the last

few decades and there was a huge parallel banking system so it's very important to protect the system to make sure that you need the authority to extend those prudential safeguards to firms that are in the business. that's what we're examining now. in each of these cases we have to move very carefully and we want to move in a way that we can s is thain them legally. >> thank you. thank you, mr. chairman. >> senator werner? >> thank you, chairman. first of all, let me start by following up on what the senator said and we concur with him that we want to avoid the sequester at all costs and my state is contingent on defense costs and

i would find it just stunning to me that if all we did was simply buy off $55 billion in one year defense sequester cost and say that's the extent of our responsibility. i mean, we need a minimum of 4 trillion as you and everyone from left to right have said and we all care about the country's security and national defense, but i wholeheartedly believe that the former chairman of the joint chiefs admiral mullen who said the greatest single threat to our country is not the threat of terrorism, but the threat of the deficit and those who say, well, all we have to deal with is the sequester or the subset of sequester, just the defense half of the house, to me, and there are others who say that should be our only top priority is stunning to mow, and i do not

think addresses the concern that we face, and i would hope that we could, perhaps, with your assistance or others, size as you mentioned and the challenge is over a five to ten-year frame that would move close to historic numbers and bring spending down and start to reform our entitlement programs. the relative ask of the american people is so much smaller than what is being asked of people all across the world. and stronger circumstances of india and china and the more we can frame that, i think, would be helpful. i also want to come back to libor, and there was some irony and as somebody who is not fully followed as closely as you other ands and here was the

circumstance that was reported in the press and the wall street journal and other papers at the ti time. we had regulators in britain. we had a host of regulators in the united states. we had treasury officials in the united states, and to my knowledge, the only guy that actually sounded the alarm and said we ought to be looking at this was the then new york fed president and yet you seem to be getting perhaps a disproportionate share of why not more when there were a host of other folks who would at least have equal or greater responsibility in acting on this matter. there is going to be a question here. you know, one with of the things that we pointed out and we all kind of scratch our head. we pointed this out and we moved

to a cftc and to start an enforcement action and we all kind of scratched our head and gosh, does it take four years to get an enforcement action through? >> one of the things that concerns me is the nature of these enforcement actions because of their confidentiality, what would happen if an enforcement entity feels they've got to do this in a confidential basis and yet the actions may end up be posing a systemic risk. how do we get that right so that under the guise of confidentiality a regulator is free to at least revel to the fsot, hey, this is not only potentially criminal or otherwise, but the action in itself is systemically risky and we can't wait three or four years before we can bring it forward? >> i think that is a very good question, and i thank you for

raising it. this is a solvable problem, but what it requires is that the enforcement agencies have in place safeguards so that when -- if they find it necessary to bring to the attention behavior that has implications to other agencies like, for example, the fed, they're able to do that without jeopardizing the investigation. there's lots of precedent for doing this, but we don't yet have in place the types of mous, and other types of agreements that would give them that satisfaction and we're on that and trying to fix that quickly. >> mr. chairman and ranking member, this would be something they think we ought to look into a bit more to make sure that i can just see some of the systemically risky action being caught up inside an investigation and created an fsoc to make sure we have the broad overview. and we ought to urge the treasury and others to get these and we'll use in place. let me follow up with a second

question. a lot of concern being raised by both sides of the aisle about the kind of voluntary actions institutions to contribute to libor and some of the incentives -- make sure folks were coming clean, and aren't there across the whole financial system a whole series of other voluntary actions where financial institutions are asked to contribute information that could also be subject to manipulation and we have whole swathes, i think about again with the chairman and ranking member as we took over the financial crisis and organizations like others that are more self-policing, and not that we want to create massive, new amounts of rules and regulations and how do we make sure if it's libor this month that there's not one of these other voluntary

industry-generated and self-regulatory bodies. how do you put a warning out to say, hey, guys, everyone needs to come out with clean, non-manipulated information. >> very good question and this is something the council is looking at right now. we've had two different sets of examples that created this. one is what you saw with libor, and as i said earlier, we're looking carefully at other survey-based measures like financial prices set by industry bodies and we'll do that very carefully, but there's a different example we have recently and the failure which points out, and this is true in a variety of areas that enforcement, the market regulators rely on the so-called self-regulatory bodies that carry the burden for examination on it, and as you saw in that case, as the report refers to in

a different context, that puts us in a position where you might have customer funds more vulnerable to fraud than might be the case. the council will take a closer look at those things, too. i don't know where that's going to take us yet, but we want to address both and not just the first question. >> mr. chairman, one of the things that many of these entities work, do self-police rather than trying to create some huge, governmental structure and we have to look at the penalty side if there is bad behavior within the voluntary organizations and to make sure that we don't have to create a whole new art face. i was hoping that being the last member i would have one more question and i see my colleague saying no, no, no, i'm three minutes over. >> i need to get settled. ask a nice long one. >> can i get one more brief on him? >> with the chairman's permission, of course.

>> permission granted. although falling into -- i can do five minutes and i've just violated it as well and one quick comment i would like to have is one interesting comment by one of the architects of the collapse of glass steagall, and let's put glass steagall back in the case and interesting transformation there and one of the things that as we were trying to sort through how you kind of get the right balance was the ability of these liquidation plans to help regulate size. you're seeing a lot of the banks trade below book value and maybe the market saying size may not be this big of asset in terms of how the market views it. are you starting to see any of these tools change any behavior?

>> mr. chairman? >> congress thought about this question long and hard in considering financial reform and it put in place tots credit, a set of pretty tough, now safeguards in the system and among them are higher capital requirements where if we're one of the largest institutions which means if you're among the largest in the world you have to have more capital against the risk you take than is true for a typical bank. >> that's one. two, it's not just living wills, but there's broad authority in the law to limit the ability of the government in the future to come in and save these first from their mistakes. we can't protect them from that. that's very consequential. there's authority in the law for regulators to brake up or limit the size and scope of those decisions in advance of the crisis if they believe

they're -- they pose too much risk to the system and my own sense is what's happening right now is the full effect and impact of those reforms as they get traction are starting to have people reassess what's the right mix of scale and scope and size that's appropriate for investors and this kind of thing. it's forcing this examination. what we're going to do is continue to look at any idea that helps satisfy this basic obligation that we have and it is more stable and resilient and what we saw in '08 and we have a much tougher framework in place than we had before the crisis and we want to make sure that we don't see that weak withened by all of the pressure we're facing to weaken those reforms. senator schumer? >> thank you, mr. chairman. i appreciate you waiting here,

mr. secretary. there's been a lot of discussion about libor in recent weeks about who knew what and when and whether various regulators should have done more on the libor. obviously, this is a serious issue and the potential impact is vast. although it goes in different directions and if people wanted low libor there are lower mortgage rates and credit card rates and things leak that and it's hardly as clear cut as some are making it, but i'm puzzled by repeated claims that you and other regulators stood by and did nothing and that somehow we are just learning about this four years later. you in the new york fed were proactive and not only by raising concerns, but also proposing structural solutions. moreover, barclays reached a large settlement with, guess who? the u.s. regulators and not the uk regulators a s ans and anybo and it was the fed and doj and working on the investigation and those didn't just start up two weeks ago. they've been going for a long

time, and the idea that we did nothing for four years and some are taking unfair shots at you. obviously, you have to answer every question and every criticism and overall, i would say this, since one or two comments were talked about even here, and i think you've been just a very, very fine, public servant from the days when we first met when we were dealing with the t.a.r.p. and the stimulus, both of which saved our country from what i think would have been the great depression, and you've been smart on the merits. down the middle, you stood up to the financial services industry when you thought they were wrong. volcker rule is an example, but you also didn't bash them needlessly, and so i give you kudos for that, and i think somebody should say it, so i did. i have a question for you on our favorite subject where we disagree. some big country over there at the other side of the pacific

oce ocean. undersecretary brainard said china's economy is too large for it to pick and choose what it follows which is what the chinese have done constantly. president hoover, the u.s. china strategic economic dialogue made significant commitments to create opportunities for americans to export and sell to china by increasing market access and leveling the playing field by eliminating several barriers to trade from foreign firms. these reforms if implemented would bolster u.s. investment in china and we've heard commit a s s like this with over and over and over again with little result. what progress has china made to live up to the commitments to increase foreign market access? what, concretely, have they done since that speech by president hu, particularly in light of

nixon by the offshore oil corporation which obviously provides chinese access, increased chinese access to the u.s. market? >> senator, i don't actually think you and i disagree on this although we disagree how best to promote the interest in this context and the problem that we agree with you and we give it a lot of attention in this context. i would be happy to have my staff and and that's a specific piece which is opening up the broader investment opportunity to u.s. firms and it goes much farther than that and not just about making sure the exchange rate over time as the markets determine. the trade surplus comes down and it has dramatically, but when you didn't provide much stronger protection for u.s. innovators and there's a whole range of other disadvantage and we need to address over time and it's not tenable for china which now has a world class manufacturing sector to maintain this range of

protections for its own basic firms. so -- >> has anything happened specifically since president hu gave his speech. trade has come down significantly, but not with the u.s. it's come down worldwide and with europe a lot, but not with us as i read the numbers. >> true, but u.s. exports, to take the other side of it, are going rapidly to china and that's a very good thing. one final question, if i might, mr. chairman. this about the fiscal cliff and the senate cut tax bill and as you noted in the opening statement and the slowdown in u.s. growth could be exacerbated by concerns about approaching tax increases and spending cuts and yesterday the senate took significant action to eliminate a major piece of that certainty so let me ask a few questions to highlight that. what percentage of the fiscal cliff does the extension of middle class tax cuts take care

of. >> the extension of the rate itself avoids $100 billion tax increase on 98% of americans. that's a very substantial piece of what you call the full compliment of fiscal measures. >> the numbers i have takes 130 billion out of 630 billion. that's a lot, right? it has a big effect because it goes to the tax rates that 98% of americans pay. >> how about the one-year amt patch? >> i have 92 out of 607. so that's 15%. you had those two things up, 36% and that's a lot. all together, how much protection from the anticipated gdp hit with the house's passage of the tax bill afford the country? my numbers are 41%. >> the 40% number slightly understates it because what people count in the overall number in some extent is already

expected and planned for. the thing that would be most damaging to confidence is the middle class americans did go up and if you let them expire it's a very substantial tax base on middle class americans and remember, it's not just you all recognize this in the senate and you don't need to just extend the rates in amt, but you need to make sure you extend the expanded tax credits that we put in place in '09 that go to americans. if you don't extend the tax credits then taxes go up to $25 million americans and we have to do that to the full mix of things and if the house were to enact that, that would take care of the most damaging piece. and the uncertainties. who should pay what, and what with percentage of the government which we hear from our republican colleagues all of the time. the number one thing we could do

is pass the tax cut which we all agree on. we may not agree on what to do with people above 250, but we all agree it should be below 250. so we can take a huge amount of uncertainty off the table. so my view, and i don't know if you agree with this, if we don't pass our tax cut they should stop talking about uncertainty. i think it's necessary to do and the need to go beyobd that and there are other things that would make growth stronger and infrastructure involving teacher or incentives to hire and we all want to see congress come together on some set of reforms to produce the long-term deficits. >> thank you, mr. chairman. i appreciate it. >> thank you again, secretary geithner for being here today. your work and the work of the council is greatly appreciated. thanks again to my colleagues and the panelist for being here today. this hearing is adjourned.